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Concordia University
Department of Economics
ECON 203 Section 4F
Winter 2010
MIDTERM EXAMINATION VERSION 1 AND ANSWERS
Name: __________________________________ C. Lau
Student ID: _____________________________ February 18
th
, 2010
Mark: ___________________/50 marks Time Limit: 75 minutes

Part I. Multiple Choice Questions. Circle the best answers (10 marks).

1. If Y<AE, then inventory would (from past midterms)
a. Increase and Y would increase. b. Increase and Y would drop.
c. Decrease and Y would increase. d. Decrease and Y would drop.

2. In 2008 and 2009, the actual unemployment rate in Canada was around 8.5%. The cyclical unemployment rate was around
a. 10%. b. 8%. c. 5%. d. 1.5%.

3. If consumption is $25,000 when income is $21,000, and consumption increases to $25,900 when income increases to
$22,000, the Marginal Propensity to Save is (from sample final)
a. 0.9 b. -0.1 c. 0.1 d. -0.2.

4. If our actual unemployment rate is 10% and our natural unemployment rate is 4%, what would happen in the long run?
(from past midterms)
a. Input prices will rise and output will fall. b. Both input prices and output will rise.
c. Input prices will fall and output will rise. d. Both input prices and output will fall.

5. In Pluto, 100,000 people are in the labour force and the unemployment rate is 25%. As Pluto moves out of a recession and
jobs increase, 20,000 discouraged workers become "encouraged" to search for jobs. The unemployment rate becomes (from
sample final)
a. 20%. b. 25.75%. c. 35%. d. None of the above.

6. Since the LAS curve is vertical, a decrease in consumer confidence in the short run (AD ) will eventually lead to (from
past midterms)
a. A rightward shift in the AS curve, a lower equilibrium price level and a lower Yp in the long run.
b. A rightward shift in the AS curve, a lower equilibrium price level and no change in Yp in the long run.
c. A leftward shift in the AS curve, a lower equilibrium price level and a lower Yp in the long run.
d. A leftward shift in the AS curve, a higher equilibrium price level and no change in Yp in the long run.

7. The simple circular flow model shows that: (from tutorial)
a. Firms hire the factors from households and produce the output consumed by households.
b. Households provide the factors to firms and buy the output produced by firms.
c. The source of household income is the producing sector and the source of firms' revenue is household spending.
d. All of the above are correct.

8. Which of the following best describes automatic built-in stabilizers in Canada? (from past midterms)
a. The size of the autonomous goods market multiplier varies inversely with the level of GDP.
b. Income tax collections automatically fall as GDP falls.
c. Government spending automatically rises as GDP falls.
d. Both B and C.

9. The real GDP in Canada in 2000 was $767 billion and in 2001 it was $659 billion. It can be concluded that
a. The price level in Canada declined between 2000 and 2001.
b. The price level in Canada rose between 2000 and 2001.
c. The quantity of goods and services produced in Canada fell between 2000 and 2001.
d. A and C.


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Part II: Answer all questions (Total=40 marks)

Question #1 GDP (Total=4 marks) (from Lyryx)
Use the following table to answer the questions below:
Item: Amount ($ Billions) Item: Amount ($ Billions)
Government purchases of goods and services 600 Consumption expenditure 700
Wages paid to labor 800 Interest and investment income 260
Investment expenditure 250 Import 100
Indirect taxes 700 Depreciation 250
Income taxes 170 Fixed capital formation 200
Profits 600 Farmers' income 200
Export 600 Unincorporated non-farm business income 200
Subsidies ???



(i) Use the aggregate expenditure approach to find the value of GDP (2 marks).

(ii) Given the GDP value from part a), use the National income approach to find the value of subsidies (2 marks).


Question #2 CPI and Inflation (Total=6 marks) (from iStudy, Algebraic Questions)
There are two goods in the consumer basket, product A and product B. The prices of these goods, P
a
and P
b
(in dollars),
are stated in the table below. Assume that 2001 is the base year.

Year Pa Pb Consumption Consumption
2001 10 20 Qa=100 Qb=100
2002 12 24 Qa=110 Qb=110
2003 14 29 Qa=120 Qb=120

(i) Calculate the consumer price index (NOT expenditure) for each of the three years (3 marks).

(ii) Using the answers obtained in part (i), calculate the annual rate of inflation over the period, starting from 2001 to

(iii) Suppose the Canadian borrowers borrowed $1000 from the Canadian lenders on December 31, 2001 and promised

10. Suppose right now our money wage or nominal wage rate is $10 per hour, and the current CPI is 150. Our labour union
believes that the CPI for next year would increase to 165. If we want to be able to afford the same goods and services that
we typically buy, the new nominal wage rate that we should ask for in the coming year should be
a. at least $10.5. b. at least $11. c. at least $11.5. d. at least $12.
to pay back $1100 on December 31, 2002. Find the real interest rate (1 mark).

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Question #3 True or False: Explain whether the following two statements are true or false. Marks are based solely
on explanation. No marks for simply stating true or false without explanation (Total=6 marks).

(i) The US trade deficits (NX<0) can be narrowed by cutting taxes and encouraging higher savings (3 marks).


Question #4 Okuns Law and AD/AS (Total=6 marks) (from iStudy, Algebraic Questions)
Suppose gY is actual Y growth rate and gYp is potential Y growth rate.

(i) Let the natural rate of unemployment in 2004 to be 6%. Fill in the table (4 answers = 2 marks).

Year Potential Real GDP Actual Real GDP gYp gY u U
2004 6,000 6,000 ---- ---- ---- 6
2005 6,600 6,300 10% 5% 2.5 8.5%

(ii) Consider your answer for 2005: In the absence of any fiscal or monetary policy intervention, explain how the




(ii) If the Canadian government wants to minimize output gap, it should always run a balanced budget BB=0 (3 marks).
economy would adjust back to Yp eventually. Use the AD/AS/LAS graph to illustrate your answers (4 marks).

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Question #5 Policies (Total=18 marks) (from Lyryx and past midterms)
Suppose the Canadian economy can be described as follows:

C = 65 + 0.8Y
d
(Y
d
is disposable income) T = 0.1Y (Percentage taxes)
I = 340 (Investment spending) X = 75 (Exports are constant)
G = 120 (Government purchases) Z = 0.22Y (Imports depend positively on our own Y)

(i) Calculate the equilibrium Y (2 marks).


(v) Using three rounds, explain how the drop in our exports affects Y. Let the first round be related to autos, the second

(vi) Find the budget balance, given your Y in (iv). Is the government running a surplus or deficit or neither? (1 mark).

Structural deficit poses challenges for Feds: Page
CTV.ca News Staff, Updated: Wed. Jan. 13 2010 12:31 PM ET

Canada's parliamentary budget officer says Ottawa faces increasing challenges with the structural deficit it has created in t he aftermath of the recession. Kevin Page told
CTV's Canada AM that the country's swelling structural deficit is "very manageable" at the moment, but must be kept in check in the long term. Page predicts in his
latest report that the structural deficit will reach $18.9 billion in the 2013-14 year. "The big deficit we're seeing this year -- the $55 billion, plus or minus -- is largely
cyclical," Page said, noting the lower revenues and stimulus spending that weighed down the current fiscal year. In three years' time, most economists believe the
Canadian economy will have returned to its full potential. But the country will still have a structural deficit at that stage, Page said, which poses problems.

(viii) Use your knowledge of BB and SBB to explain the article above (3 marks).
(ii) Find the autonomous multiplier (1 mark).
(iii) Find the government budget balance BB, given your Y in (i). Is the government running a surplus or deficit or
neither? (1 mark).
(iv) Suppose the recent banking problems have shaken firms confidence. This translates to our investment
spending dropping from 340 to 140 due to a weaker investment confidence. Find the new Y (2 marks).
round related to clothing and the third round related to food (6 marks).

(vii) Suppose the government wants to push the economy back to the Y level in (i) but with investment still at 140. Fi nd
the new G necessary. Also find the new budget balance BB (2 marks).

The End